For many Ontarians, owning a cottage is “the dream”, and most are understandably keen to ensure that a treasured place full of family memories is kept in the family for generations. However, without proper estate planning, a family cottage can give rise to family disputes and lengthy litigation.

Cottage owners (and buyers) should be aware that cottage ownership involves legal complexities that may not apply to their principal residence. Having experienced legal advice ensures all tax, family, and estate considerations are taken into account to avoid problems down the road.

Set Expectations to Avoid Future Disputes

It is a good idea to have a group discussion that includes any family members who are current owners or users of the cottage, as well as those who may become involved in the future. Establishing each person’s wishes and expectations reduces the likelihood of someone being blindsided in the future when parents or other elder family members pass away. Having this conversation earlier rather than later may make things easier in the long run.

Some issues that should be discussed between family members and any other interested parties include:

  • Who will cover which expense(s)
  • Who is responsible for repairs
  • Whether the property will be rented out to non-family or not
  • What process should be used to resolve disputes
  • Who will have legal ownership of the property
  • Any generational transfer considerations, especially where some siblings may not be interested in using or owning the cottage

Capital Gains & Land Transfer Taxes

Generally speaking, Canadians have one principal residence exemption that shields a property from capital gains taxes. Therefore, if a cottage has a sole owner, capital gains taxes will be payable when the cottage is transferred to a family member after the owner’s death. It is important to note that Canada Revenue Agency does not accept the strategy of “gifting” a cottage to a family member. This is a major consideration since the tax bill is often high, and if no one in the family has the resources to pay it, the cottage could be sold to cover estate expenses.

One strategy to help to minimize capital gains tax is to transfer undivided interests in the cottage to adult children over multiple years. This allows the tax bill to be spread out over several years, often at a lower rate. 

In Ontario, land transfer taxes are also payable on the transfer of a cottage. These apply to any transfer, regardless of whether it takes place during the lifetime of the owners or after they pass away. Note that there may also be an additional tax if the property is being transferred to a child that is not a Canadian or permanent resident.

Probate Fees

While land transfer taxes are not affected by the timing of the transfer, this is not the case for probate fees. In Ontario, where the owners of a cottage bequeath the cottage through their Will instead of transferring it during their lifetime, the estate is responsible for paying probate fees on the property’s value.

Trust in Trusts?

One option to consider is setting up a trust. By transferring a cottage to a trust during the owners’ lifetime, legal fees related to probate and probate fees can be avoided.

Trusts also give the owners additional time and flexibility for estate planning. The owners can determine how ownership shares should be divided between multiple family members. For example, they may bequeath the cottage only to those who want it or agree to certain rules.

There are some disadvantages to using a trust. In some situations, the use of a trust triggers capital gains and property transfer taxes. There are also administrative limitations and tax complexities if owners wish to use the principal residence exemption.

Ownership Structures

A major decision when passing on a cottage to children or other family members is the legal structure of the property’s ownership. The three primary options are co-ownership, joint tenancy, and tenancy in common. Each has different consequences for ownership shares upon the death of a part-owner.

Co-Ownership

Co-ownership agreements can be customized to accommodate the preferences of multiple children or family members who are interested in sharing the cottage. These agreements can include terms regarding cost-sharing, scheduling, restrictions, and dispute resolution.

Joint Tenancy

When multiple parties hold a cottage as joint tenants, and one of them passes away, the deceased’s share is divided equally among the surviving cottage owners. Any capital gains taxes are owed by the deceased’s estate and not the remaining owners.

Tenancy in Common

When a part-owner under a tenancy in common passes away, their share forms part of their estate and will be distributed as per their Will.

Proactive Planning for the Future

Family cottages can create countless cherished memories for generations. However, without proper legal and estate planning, they can lead to familial strife and costly litigation. Including all interested parties in proactive discussions about the considerations above can help ensure a smooth transition in the future. An experienced estate lawyer can guide families through the legal and financial complexities and help save money, avoid stress, and provide peace of mind.

Contact Tierney Stauffer LLP in Ottawa, Cornwall, Arnprior, Kingston & North Bay for Comprehensive Estate Planning

Proactive and thorough estate planning can help avoid delays or costly litigation between beneficiaries in the future. Tierney Stauffer LLP uses a client-focused approach and provides innovative guidance through the estate planning and administration processes. Our estate lawyers provide practical and honest advice to clients and advocate for their interests in litigation, mediation, or arbitration. To schedule a confidential consultation with a member of our team, contact us online or call 1-888-799-8057.

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